Many people dream of an early retirement where they can quit the long hours, focus on hobbies and causes they are passionate about, and spend time with loved ones. While doing so is a great achievement, it can only be a viable option if you have effectively planned your financial matters in a way that allows you to live your desired lifestyle for the years — or even decades — ahead.
Here are several things to consider before making the decision to clock out for good.
Retire free of debt. Many advisors counsel clients that retirement can only begin once you have no debt or are as close to being debt-free as possible. As you begin to plan out your retirement, you want to ensure that you have paid down your mortgage, have no credit card debt or any other major types of debt.
If you are heading into retirement with a significant portion of your mortgage still pending, you may want to consider pushing back your retirement or start to make extra payments to pay it down.
[See: 7 Dividend Stock Alternatives to Fuel Retirement Income.]
A successful retirement can be derailed or hampered by continued debt payments eating into your hard-earned nest egg/income.
Calculate whether your nest egg will support the lifestyle you desire. Before deciding to retire, it is crucial to determine whether your income and budget aligns with the lifestyle you expect to have in your golden years.
You should account for how much you want to spend on housing expenses (both on your current home and future vacation homes, as relevant), daily expenses, travel and other financial elements that may be important to you like making charitable contributions or supporting a loved one.
When thinking about how much money you will need to get you through retirement, it’s typically advisable to have more money saved than you think you might need, as life expectancies are generally becoming longer.
According to a recent report by the National Center for Health Statistics, the average life expectancy for Americans is nearly 79 years (76 for men and 81 for women). You must ensure that you have enough money to last you should you live into your early 80s or 90s because in today’s world, it is not a far-fetched possibility.
It is prudent to plan for living into those later years so you can maintain your desired lifestyle and live comfortably.
Ensure your portfolio is aligned with your risk tolerance and goals. With unpredictable geopolitical events around the world and consistent headlines coming out of Washington, it is important for pre-retirees to maintain their focus on investing for the long term. Instead of reacting drastically to short-term market events, stay the course and focus on portfolio diversification, which will help you withstand any losses during market downturns.
Additionally, as you approach an early retirement, you should also make sure that your portfolio is aligned with your risk tolerance and financial goals for retirement.
Many investors choose to shift toward a more conservative asset allocation as they grow older. While this is prudent due to market risk, you should also remember another type of risk: the silent killer, inflation. You want to keep in mind that your portfolio and assets also have to grow enough to keep pace with inflation.
[See: 7 Monthly Dividend Stocks for Steady Income.]
Inflation is an important factor to consider when it comes to post-retirement portfolio growth: positioning yourself too conservatively, and thus hampering your portfolio’s ability to keep up with inflation, can be a mistake in itself. Ensure you have a well-diversified portfolio that can ride out any downturns but still participate in market growth.
Remember, like stated above — retirement lasts longer than one may think.
Consider health care costs and insurance. People aren’t eligible for Medicare until they turn 65, so if you’re retiring before that, it is critical to have a plan in place to pay for any health care expenses. There are several options for purchasing health care insurance in retirement (or with proper planning before), but unless you can keep your employer-sponsored health care plan into retirement or obtain coverage through a spouse’s current employer, the costs can be significant.
Examples of coverage options would be through state and federal exchanges or the Consolidated Omnibus Reconciliation Act (COBRA), which allows you to keep your current employer’s coverage for 18 months and may be a good idea if you’re near the age of 65.
Long-term care insurance can also be a route to consider dependent on the size of your assets. Nursing homes, should you or your spouse find yourself needing care, can be very expensive and quickly erode your savings. Long-term care insurance could prevent and alleviate financial stress should such a scenario occur.
Regardless of your situation, ensure that you will have enough money to pay for any health care insurance and costs that you may incur during retirement. While how much you will actually need for medical expenses is uncertain, you should have enough extra money set aside to contribute toward anything unexpected such as a sudden illness or injury.
Make sure you are mentally prepared to stop working. Many people don’t consider that a sudden change from working 40 or more hours per week to having no employment responsibilities can be jarring. It’s important to outline a plan to keep your mind and body stimulated.
What activities will you finally have the time and opportunity to do? What new skills would you like to learn? What are your goals for spending time with grandchildren, friends, or other loved ones?
You may also want to consider, after you’ve taken a well-deserved break, picking up a job that will keep you active for at least a few hours each week. Think about working or volunteering somewhere that supports a cause you are passionate about, helps you learn a new skill, or provides other opportunities that are on your bucket list.
[See: 8 Do’s and Dont’s During Market Volatility.]
Taking these steps can help you turn your dream of early retirement into a reality. If you’re unsure of whether you’re ready to take the next step, it may be worth speaking to a financial advisor who can help ensure you’re positioned for a solid financial future.
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5 Things to Consider Before Taking an Early Retirement originally appeared on usnews.com
